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evidence from France
Carl Gaigné, Karine Latouche, Stéphane Turolla
To cite this version:
Carl Gaigné, Karine Latouche, Stéphane Turolla. Vertical ownership and export performance : firm-level evidence from France. [University works] auto-saisine. 2015, 66 p. �hal-01209073�
Vertical ownership and export performance: firm-level
evidence from France
Carl GAIGNE, Karine LATOUCHE, Stéphane TUROLLA
Working Paper SMART – LERECO N°15-07
September 2015
UMR INRA-Agrocampus Ouest SMART (Structures et Marchés Agricoles, Ressources et Territoires) UR INRA LERECO (Laboratoires d’Etudes et de Recherches en Economie)
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Vertical ownership and export performance:
firm-level evidence from France
Carl GAIGNE
INRA, UMR1302 SMART, F-35000 Rennes, France
Karine LATOUCHE
INRA, UR1134 LERECO, F-44316 Nantes, France
Stéphane TUROLLA
INRA, UMR1302 SMART, F-35000 Rennes, France
Acknowledgements
We would like to thank Flora Bellone, Andrew Bernard, Sylvain Chabé-Ferret, Matthieu Crozet, Bruno Larue, Dominique Torre, and participants at the AAEA annual meeting, ETSG, EEA, JMA, SFER, Danish International Economics Workshop at Aarhus, CREM--SMART LERECO workshop at Rennes, and seminars at %University of Angers and at Laval University for useful discussions and comments. A special thanks to Cécile Le Roy who provides great assistance with the data. Gaigné and Turolla thank the University of Laval and the University of California, Berkeley, for their hospitality while part of this paper was written.
Corresponding author Karine Latouche
INRA UR LERECO
Rue de la Géraudière, BP 71627 44316 Nantes cedex 03, France
Email: karine.latouche@nantes.inra.fr Téléphone / Phone: +33 (0)2 40 67 50 51 Fax: +33 (0)2 23 48 53 80
Les Working Papers SMART-LERECO n’engagent que leurs auteurs.
Vertical ownership and export performance: firm-level evidence from France
Abstract
This paper examines whether ownership arrangements between manufacturers and intermediaries improve the export performance of the former. We develop a theoretical model of trade with vertically linked industries whereby upstream manufacturers compete in export markets and may decide to acquire ownership stakes in an intermediary. The model highlights how more productive firms succeed in managing the double marginalization problem and in reducing the costs of exporting through forward acquisition. On the flip side, we find that vertical ownership creates a market externality among manufacturers due to the reallocation of market shares from small firms to large firms, forcing some low-productivity firms to exit foreign markets. Predictions from the model are tested using firm-level data on the French agri-food sector. The results confirm the model predictions and reveal that the benefits from forward acquisitions could be quite large.
Keywords: forward integration, trade intermediation, export decision, heterogeneous firms,
markups.
JEL classifications: F12, L22
Performances à l’export et lien vertical: analyse des données des entreprises françaises
Résumé
Dans cet article, nous étudions l’impact de l’acquisition d’un intermédiaire par une entreprise sur les performances à l’export de cette entreprise. Nous proposons un modèle avec lien vertical entre industries, dans lequel les entreprises sont en concurrence à l’export et peuvent ou non acquérir des parts dans des intermédiaires de commerce. Nous montrons que l’acquisition d’intermédiaires permet aux entreprises les plus productives de gérer le problème de double marginalisation via l’acquisition et de bénéficier de coûts d’accès aux marchés étrangers plus faibles. Nous montrons également qu’il existe une externalité de marché à l’acquisition d’intermédiaires puisque une réallocation des parts de marché s’effectue vers les grandes entreprises, conduisant les entreprises les moins productives à quitter les marchés étrangers. Les prédictions du modèle sont testées sur les données des entreprises agroalimentaires françaises. Les résultats valident les prédictions du modèle et montrent que les bénéfices à l’acquisition d’intermédiaires sont conséquents.
Mots-clés : intégration de l’aval, exportation, entreprises hétérogènes, intermédiation Classifications JEL : F12, L22
Vertical ownership and export performance: firm-level evidence from
France
1
Introduction
Do firm boundary decisions affect the export performance of firms? The study of firms’ internal organization, in connection with their performance, has been a topic of considerable attention since the seminal contribution of Coase (1937), and gives rise to a rich set of theories. The literature on forward integration was almost exclusively developed in a domestic framework, and the decision to integrate remains largely unexplored from an international trade perspec-tive.1 This lack of interest is surprising regarding the significant part of export-oriented firms that have chosen to integrate downstream stages of their supply chain. For instance, numerous clothing manufacturers such as Zara and Mango have pursued full integration of wholesale and retailing operations.2 Forward integrations are also frequently observed in other sectors such as
the personal computer industry (e.g., Apple, Dell), the oil industry (e.g., BP, Shell, Total), the automotive and tire industries (e.g., Ford, GM, Toyota, Goodyear), and the food and beverage industries (e.g., The Greenery B.V., E & J Gallo Winery) which is the industry that is analyzed in this paper.
Typically, when a manufacturer thinks about how to reach end consumers two options prevail: either contracting with independent retailers (market transactions) or managing in-house the selling operations through the internal divisions it owns (forward integration). It is well-known from the theory of the firm that by choosing to internalize stages of the sale process (whole-saling, logistic supply chain, retail stores) instead of contracting with arm’s length parties, a manufacturer aims to reduce market inefficiencies such as vertical externality (the double marginalization problem), transaction costs and contractual hazards, and inefficient informa-tional transfers, for instance.3
Intuitively, there are good reasons to believe that the benefits from integrating forward are greater when selling abroad. Once having crossed the borders, manufacturers incur additional sunk entry costs and address new retail market environments that require specific knowledge traditionally held by the intermediary sector.4 Informational barriers are also obstacles that
1By contrast, there exists a burgeoning literature that examines the impact of trade policies on firms’ decision to
integrate backward (e.g., Conconi, Legros, and Newman, 2012; Alfaro, Conconi, Fadinger, and Newman, 2010).
2American Apparel, one of the most iconic firms of the US garment sector, has even made a selling point
of this internal organization. On its website, the company writes: “We believe that having manufacturing under the same roof as design, marketing, accounting, retail and distribution gives us the ability to quickly mobilize all departments, to respond directly to changes in the market, and to have complete visibility over our product - start to finish.” (see http://www.americanapparel.net/aboutus/verticalint/).
3See Lafontaine and Slade (2007) for a primer on forward integration.
4Examples of such costs are compliance with public and private standards, language translation services,
bu-reaucratic costs, and costs of establishing distribution networks, among others. Exporting also requires specific knowledge to manage multiple destinations with heterogeneous demand and contingencies.
exporters face in regard to finding local buyers. The role of intermediaries would thus be magnified abroad, and the greater competition encountered in foreign markets creates more damaging market inefficiencies resulting from contractual relationships. Therefore, acquiring (fully or partially) an intermediary may help a manufacturer to increase its operating profits by fixing the double marginalization problem and by lowering fixed export costs while acquiring critical information on foreign markets.
In this paper, we theoretically and empirically study the impact of the acquisition of an interme-diary on the export performance of manufacturers. To reach our goal, we first formulate a gen-eral model of trade with two vertically related industries in which heterogeneous manufacturers supply a differentiated product and domestically-based intermediaries (downstream firms) dis-tribute the differentiated products both in the domestic and foreign markets. Manufacturers and intermediaries can be linked by financial arrangements (vertical ownership) involving the acquisition of assets (Grossman and Hart, 1986) or profit claims (Riordan, 1991), or both. The manufacturer’s decision to acquire ownership stakes in an intermediary governs the trade-off between higher operating profits and higher costs of acquisition. In an open economy, this choice depends on three key variables: manufacturer efficiency, trade costs and foreign market size. This framework enables us to explore empirically the consequences of using forward inte-gration in distribution activities (i.e., wholesaling or retailing) as a business strategy to enhance foreign market-access.
Our contribution is threefold. First, contrary to the trade literature, we consider that intermedi-aries operate under imperfect competition, act strategically and may be independent, partially owned or fully controlled by manufacturers. Under these circumstances, a problem of double marginalization occurs because firms along each side of the vertical chain have market power and set a price above the marginal cost. From this setup, we determine endogenously the prob-ability of acquiring ownership stakes in an intermediary and its impact on the probprob-ability of serving a market and export sales. Second, our approach differs also from the industrial orga-nization literature by considering heterogeneous firms producing in monopolistic competition as well as fixed and variable trade costs in a general equilibrium model. Third, we test empiri-cally the implications of the model from firm-level data providing information about financial participations in intermediaries and export outcomes of manufacturers.
Developing our model, we show that the upward shift in sales associated with vertical own-ership is higher for the most productive manufacturers while the acquisition costs do not vary among them. This result holds under different assumptions related to the market structures and vertical relationships. In other words, we find a productivity sorting of firms. Exporters con-trolling their distribution network are, on average, more productive than the others. As a result, vertical ownership enables highly-efficient manufacturers to neutralize double marginalization in the vertical chain and to reduce access costs for foreign markets, as expected, and, in turn, boosts their probability of exporting and export sales. As only high productivity (or, equiva-lently, large) firms are able to acquire equity shares in an intermediary, this creates a market
externality among manufacturers due to the reallocation of market shares from small firms to large firms. By controlling an intermediary, large firms enjoy higher foreign demands and hurt small firms that lose market shares or exit from foreign markets. We also show that manufac-turers that have ownership stakes in an intermediary are more likely to serve countries with a small potential market than firms without financial participations in an intermediary. Hence, the positive exporter productivity premium (on average, firms that choose to export directly exhibit a higher productivity than firms that export through intermediaries, as shown by Davies and Jeppesen, 2012) can also be due to better control over distribution channels by the more productive firms.
We test the implications of our model using an original dataset compiling information on French firms from two sources. First, we observe from the Amadeus database (Bureau van Dijk, 2008) the financial participations of manufacturers in intermediaries for two distinct years (2008 and 2012). We then supplement the firm-level data with the French Customs data and gather infor-mation on firms export values by destination country. We concentrate our empirical analysis on the “food and beverage industry” (i.e., food firms) due to the prevalence of intermediaries in the flows of food products. This sector is characterized by a large number of heteroge-neous agri-food manufacturers selling differentiated products and by use of specialized whole-salers/retailers with various degrees of partial vertical integration (Reardon and Timmer, 2007). Overall, we use pooled cross-section data that provide information on 14,090 food firms. Our findings support the hypothesis of an “intermediary premium”on the export performance of manufacturers. As predicted by the model, we observe first that firms self-select to acquire equity shares in intermediaries based on their productivity. The combination of lower marginal costs and lower markups enables them to cover market entry costs for a larger set of destina-tions, increasing in turn both their probability of exporting and their export revenues. Moreover, we confirm that firms owning intermediaries have non-negligible advantages for entering for-eign markets, especially those with a small market potential. Finally, we find that firms owning intermediaries enjoy lower market-access costs, which lends support to the transfer of intangi-ble inputs from intermediaries to their acquirers.
Related literature. By addressing the issue of intermediation in a context of international trade, this paper relates to the trade literature that questions the existence of intermediaries in trade flows. Early theoretical contributions viewed intermediaries as agents that facilitate matching between foreign buyers and sellers. By offering their network of contacts, interme-diaries reduce matching frictions and search costs between buyers and sellers (e.g., Rubin-stein and Wolinsky, 1987; Rauch and Watson, 2004; Antràs and Costinot, 2011), thus allowing trade for (small) manufacturers that cannot bear the cost of distribution (Blum, Claro, and Horstmann, 2012). More recently, several studies have highlighted the prevalence of interme-diaries in export flows. Wholesale and retail firms account for approximately 20% of French exports (Crozet, Lalanne, and Poncet, 2013), 9% of US exports (Bernard, Jensen, Redding, and Schott, 2010), and 29% of China exports (Ahn, Khandelwal, and Wei, 2011). A number
of general patterns emerged from these empirical works: intermediaries are smaller than man-ufacturing firms, they export a wider range of products in a narrower number of destinations than “ pure producers”, and they churn products more frequently (Bernard, Grazzi, and Tomasi, 2014). Because intermediaries are more diversified than manufacturers, they also export lower volumes per product-destination. Based on these findings, several authors proposed to recast standard models of trade with heterogeneous firms so that domestic manufacturers can choose between two technologies of distribution: either export directly (direct exporting) or contract with an intermediary who takes over the selling activities (indirect exporting). By handling large product portfolios, intermediaries are able to spread the fixed costs of exporting over several products (economies of scope) and thus offer cheaper access to foreign markets. This advantage is however counteracted by a lower profitability due to either higher variables costs (Ahn, Khandelwal, and Wei, 2011), market power exerted by intermediaries (Akerman, 2014), or contractual frictions (Felbermayr and Jung, 2011). This tradeoff causes productivity sorting among firms as in Melitz (2003)’s model and only the most efficient firms find it profitable to export directly.5 The remaining fringe of exporting firms thus export through intermediaries.
One of the common findings of these papers is that the share of intermediaries in export flows becomes more important for small potential markets with important market-access costs. Our approach differs significantly from this literature by accounting for the fact that manu-factured goods are necessarily sold by a dedicated corporate service external to the production process. Because only the most-productive firms can bear the fixed costs of acquisition and dis-tribution, part of the intermediaries remains independent. We thus propose an alternative expla-nation for the prevalence of intermediaries in export flows that relies on manufacturers’ produc-tivity heterogeneity (production costs, management) and their ability to extend their boundaries rather than on an intermediary technology advantage (i.e., lower fixed export costs). Further, by explicitly allowing manufacturers to modify the nature of the vertical relationship with inter-mediaries in our model, the double marginalization issue is accounted for and markups become firm-specific. Forward integration (full or partial) then appears as an interesting device to lower final prices while raising export revenues. This mechanism explains why firms owning their own distribution network are more prevalent in certain destinations, a point that has not been emphasized until now.
The rest of the paper is organized as follows. We develop in Section 2 the model from which we build our predictions. In Section 3, we introduce the data used and document several differences between acquiring and non-acquiring firms. Section 4 discusses the empirical strategy adopted to test the main predictions of the model and reports clear-cut results that give support to the
5In addition to the case in which firms are heterogeneous in terms of efficiency, Crozet et al. (2013) investigate
the quality-differentiation case. Similar to the literature, for productivity sorting, intermediaries export the most expensive varieties (i.e., higher costs of production). By contrast, in the quality-sorting setting, they export the least expensive products (i.e., lower-quality products). These predictions are then compared with the data and the authors show that, for a given product, price differences between direct and indirect exporters are driven by the level of quality differentiation.
existence of an intermediary premium. Finally, Section 5 concludes.
2
A theory of vertical ownership in a global economy
In this section, we present a general equilibrium model with trade in the presence of vertical interactions and ownership arrangements with heterogeneous manufacturers. Our purpose is to derive a set of predictions that will be then confronted with firm-level data.
2.1
General assumptions
Let us set the basic model. Some extensions are discussed in Appendix A. Consider in each country a continuum of manufacturers (upstream firms) with a mass M producing a differenti-ated good and a continuum of domestically-based intermediaries (downstream firms) distribut-ing differentiated products in the domestic and foreign markets. Manufacturers and interme-diaries are linked by the input supply and by financial arrangements (vertical ownership). We consider a single period of production, but we can easily extend our framework to multiple periods by assuming an exogenous probability about the survival of firms as in Melitz (2003). Typically, vertical integrations involve the acquisition of assets (Grossman and Hart, 1986) or an ownership share of profits, i.e., cash flow rights (Riordan, 1991), or both. Indeed, if equity establishes an ownership claim on residual profits, it does not necessarily change control rights over managerial decisions. We assume that partial ownership (i.e., an ownership share strictly between zero and one) does not give control over the target firm so that each firm has its own manager. Partial ownership only induces a partial redistribution of operating profits from the target to the raider. This form of ownership arrangements, also called passive ownership, allows us to avoid the discussion of the level at which shareholdings control over pricing decisions arises. The upstream supplier may then offer to buy a fraction θ ∈ [0, 1] of the downstream firm at price b(θ) with b = 0, when θ = 0 and b0 ≡ ∂b/∂θ > 0.6 However, when θ =
1, the manufacturer has the control over managerial decisions of the target (i.e., controlling ownership). This limit value is normalized at 1 without loss of generality.
We consider that each intermediary distributes a single variety and each manufacturer produces a single variety and supplies its product to a single intermediary. We also assume that in-termediaries exclusively distribute in foreign countries varieties that have the same origin than manufacturers (for example, French intermediaries export the manufactured goods produced by producers set up in France). In Appendix A.1, we show that our results hold with multi-product intermediaries with local monopoly powers.
Hence, in the basic model, there are M configurations in each country implying a manufacturer and an intermediary. Further, we suppose that all firms (manufacturers and intermediaries)
6Unlike the standard IO literature, which has almost exclusively focused on the case of full integration, we
enjoy market power. We assume the following sequence of events. In the first stage, manufac-turers and intermediaries decide whether to enter/exit. In the second stage, the manufacturer chooses to acquire (or not) equity shares in an intermediary (θ). In the third and fourth stages, the manufacturer fixes the wholesale price, z, knowing the price determined by the interme-diary. Then, the intermediary takes the wholesale price as given and maximizes its profits by choosing a final price p.
2.2
Demand, market structure and prices
As in the standard trade literature, consumers preferences are defined with a CES utility func-tion. The market structure allows monopolistic competition, and trade costs have fixed and variable components. Because preferences across varieties of product have the standard CES form, each firm producing in country i faces a demand from country j for its variety v given by qij(v) = EjPjε−1pij(v)−ε, where ε > 1 is a constant elasticity of substitution, pij(v) is the price
of variety v paid by the end consumer in country j, Ej is the share of income of households
living in country j for the differentiated good, Pjε−1 = hRΩ
jp(v)
1−εdvi−1 is the price index
prevailing in country j, and Ωj is the set of varieties available in country j.7 The export sales
for a firm located in country i and serving country j are given by pijqij with
pijqij = Ajp1−εij (1)
where Aj ≡ EjPjε−1.
Each manufacturer uses only labor to produce, and its marginal cost to serve country j is given by wiτij/ϕ, where wi is the wage rate prevailing in country i, τij is the “iceberg” variable
trade cost which is country-specific, and ϕ is the labor productivity. We choose labor as the numeraire so that wi= 1.
Contrary to what is usually assumed in the trade literature, each product is not directly exported by the producer but necessarily traded by an intermediary. The distribution of products in country j induces a fixed cost fij and a constant marginal cost normalized at 0. Hence, the fixed
distribution cost is specific to each destination and each country of origin. The intermediaries do not differ in productivity, but have different levels of shareholding. They can be independent, partially owned or fully controlled by a manufacturer. The manufacturers differ in the supplied variety v, their labor productivity ϕ and their equity shares θ. The parameter ϕ is treated as exogenous, while θ is determined endogenously.
The operating profits of an intermediary distributing in country j a variety produced in country i is given by
Λrij ≡ (pij − zij)qij (2)
with zij the unit price paid to the manufacturer by the intermediary to distribute the product.
The operating profit of manufacturer located in country i for a variety consumed in country j is given by
Λmij ≡ (zij − wiτij/ϕ)qij. (3)
Based on these operating profits, the total profits of operators can be expressed. The profit of the intermediary distributing variety v located in country i is then given by
πi(θ, ϕ) = (1 − θ)
X
j(Λ r
ij − fij) + b(θ) (4)
whereas the profit of a manufacturer in country i is Πi(θ, ϕ) = X jΛ m ij + θ X j Λ r ij − fij − b(θ). (5)
Because we consider monopolistic competition, Aj (Pj and Ej) is treated parametrically by
firms when they determine their prices and the equity shares to be bought. Maximizing πiwith
respect to pij knowing Eq.(1) yields the equilibrium prices given by p∗ij = εzij/(ε − 1). Then,
the price of a manufacturer maximizing its profit is given by zij∗ = ε
ε − 1 + θ τij
ϕ (6)
with ∂zij∗/∂θ < 0. It is worth noting that even if the pricing rule applied by the intermediaries is standard (the price is equal to a constant markup, ε/(ε − 1), times marginal cost), the price policy set by the manufacturers allows for variable markups due to the financial arrangement with intermediaries. In other words, markup is not constant with vertical ownership although demands are iso-elastic. As expected, the price paid by the intermediary decreases with θ. Note that when θ = 0, the markup achieves its maximum value (vertical separation) while the price of the manufactured good is equal to the marginal cost when vertical integration occurs (θ = 1). Without participation in an intermediary, each firm sets prices at a markup over marginal cost and we obtain the so-called double-marginalization problem. Hence, vertical ownership enables the manufacturer to neutralize double marginalization in the vertical chain. Of course, there are other strategies to fix the double marginalization. This is discussed in Appendix A.3 (again, our main results hold). Even if the wholesale price is the only available instrument to determine the terms of trade with its intermediary, the manufacturer may reduce excessively high prices set by its intermediary by acquiring equity shares.
Hence, using Eq.(6), the equilibrium price paid by a consumer residing in country j is given by: p∗ij = ε ε − 1 ε ε − 1 + θ τij ϕ. (7)
Finally, note also that, replacing (z∗ij) by its expression in Eq.(3) implies Λmij = 1 − θ ε − 1 + θqij = (1 − θ)(ε − 1) ε Λ r ij (8)
with Λmij < Λrij as well as ∂Λmij/∂θ < 0 and ∂Λrij/∂θ > 0. Hence, an increase in θ shrinks the operating profits of the manufacturer and boosts the operating profits of the intermediary. Indeed, the margins (zij − τij/ϕ) for the manufacturer (or (pij − zij) for the intermediary)
decrease with θ, while the demand (qij) for a variety increases due to a lower price paid by the
end consumers. Finally, the former effect dominates the latter effect for the manufacturer while the reverse holds for the intermediary.
2.3
Equilibrium vertical ownership
Each manufacturer sets θ by maximizing its profits given by
Πi = (ε − 1 + θ)ε−1ϕε−1 (ε − 1)1−εε2ε X jAjτ 1−ε ij − θ X jfij − b(θ)
where Eqs.(1), (2), (6), (7), and (8) have been inserted in Eq.(5). The mechanisms at work are as follows. On the one hand, a rise in θ induces a higher cost of acquisition (b(θ)) and a higher fraction of fixed export costs to be incurred by the manufacturer (fij). On the other hand, by
in-creasing its equity share in its intermediary, the manufacturer raises the consolidated operating profits (i.e., its operating profits ΣjΛmij plus the share of operating profits of the intermediary
al-located to the manufacturer θΣjΛrij). Unambiguously, the operating profits of the intermediary
increase with θ due to a reduction in the negative effects of the double marginalization. Even if ∂Λmij/∂θ < 0 due to a lower markup, the gains associated with higher operating profits for the intermediary offset the losses related to lower margins in production.
The first order condition ∂Πi/∂θi = 0 implies that the equilibrium equity share is given by θ∗
such that X jΛ r ij − b 0 (θ∗) −X jfij = 0 (9)
where θ∗ is an interior solution (0 < θ∗ < 1) if and only if b00(θ) >P
j∂Λrij/∂θ.
Vertical separation vs. vertical integration. Consider first that b00(θ) < P
j∂Λ r
ij/∂θ so
that there is no interior solution. Under this configuration, the optimal choice for each firm is either vertical separation (θ∗ = 0) or vertical integration (θ∗ = 1). A manufacturer chooses to integrate fully (θ∗ = 1) if and only if Πi(1, ϕ) > Πi(0, ϕ). Because the operating profits
of a manufacturer increase continuously with its productivity, the occurrence that Πi(1, ϕ) >
Πi(0, ϕ) is more likely when ϕ is high. It is straightforward to check that there exists a unique
and Λrij(0, ϕi), Πi(1, ϕi) = Πi(0, ϕi) implies ϕε−1i = ε ε−1(ε − 1)1−ε2 εε−1(ε − 1)1−ε− 1 ε h P jfij + b(1) i P jAjτ 1−ε ij . (10)
For all ϕ ≥ ϕi, the manufacturer has full control over the intermediary, and its profit is given by Πij(1, ϕ) =
P
j[Λ r
ij(1) − fij] ≥ b0(1). Further, ∂ϕi/∂τij > 0 and ∂ϕi/∂Aj < 0. Hence, the
revenue gains resulting from lower prices due to forward acquisition are higher in the countries facing higher potential demand or lower export costs. The marginal gain of an increase in θ rises with firm productivity and the size of the potential market.
Partial vertical ownership. Consider now the case in which b00(θ) >P
j∂Λ r
ij/∂θ so that an
interior solution may occur. Under this configuration, the interior solution θ∗is implicitly given by Eq.(9) or, equivalently, by
(ε − 1 + θ∗)ε−1 ε ε − 1 1−ε ϕε−1 εε X jAjτ 1−ε ij = b 0 (θ∗) +X jwifij (11)
where we have inserted the expression of Λr
ij(θ, ϕ) in Eq.(9). Some standard calculations reveal
that ∂2Π
i/∂θ∂ϕ > 0 so that ∂θ∗/∂ϕ > 0 when 0 < θ∗ < 1. In addition, we have ∂2Πi/∂θ∂τ <
0 and ∂2Π
i/∂θ∂Aj > 0, implying that ∂θ∗/∂τij < 0 and ∂θ∗/∂Ej > 0. As expected, the
equilibrium equity share increases with the productivity of the firm, trade liberalization and the size of trade partners.8
It is worth noting that partial integration can be preferred to full integration under some circum-stances from the acquirer point of view. The recent IO literature shows that partial backward integration is more profitable than full integration (Greenlee and Raskovich, 2006) because it serves as a strategic device to relax price competition in the downstream market (Hunold and Stahl, 2015), and favors input foreclosure (Gilo, Levy, and Speigel, 2014). By contrast, there are very few papers on partial forward integration mainly because under the standard hypothe-sis of full information in the supply hierarchy, a manufacturer may extract the monopoly profit of the integrated structure through the use of non-linear contracts, irrespective of the ownership stake. Assuming asymmetric information on retail costs, Fiocco (2014) shows that partial for-ward ownership may be better for manufacturers than full integration depending on whether the price-raising effect from partial ownership outweighs the partial misalignment of profit objec-tives. To our knowledge, our paper is the first to analyze (partial or full) forward integration in a context of both heterogeneous manufacturers and downstream markets. Due to the reduction of the double marginalization effect, a manufacturer always prefers to integrate forward but the
8Note that, although there is an interior solution, all firms do not acquire an intermediary. Indeed, there exists a
threshold value of productivity ϕ−i such that θi∗= 0 when ϕ < ϕ−i given by −b0(0)+
P j[Λ r ij(0, ϕ − i )−wifij] = 0.
In addition, above a limit value of productivity ϕ+i , the firms fully control intermediaries (θ∗i = 1) when ϕ ≥ ϕ+i .
Note that ϕ+i is implicitly given by −b0(1) +P
j[Λ r ij(1, ϕ
+
share of ownership stake depends on firm efficiency and the features of markets to be served. To summarize, from the expressions of the productivity cutoffs obtained from Eq.(10) and Eq.(11), we obtain the following proposition:
Proposition 1 The probability of a manufacturer acquiring equity shares in an intermediary increases with its productivity, trade liberalization, and the market size of trade partners. Hence, among the firms that are sufficiently productive to enter foreign markets, the less effi-cient ones contract with intermediaries (“non-acquiring firms”), while the most productive ones delegate their distribution operations to intermediaries in which they hold a stake (“acquiring firms”) or, for the highest level of productivity, manage these operations in-house (again, “ac-quiring firms”). This productivity sorting among firms can be discussed in light of recent con-tributions in the trade literature analyzing manufacturers’ choice to export directly or indirectly (e.g., Ahn, Khandelwal, and Wei, 2011; Crozet, Lalanne, and Poncet, 2013; Akerman, 2014). Similar to our model, those works show that the most productive manufacturers find it more profitable to manage their own distribution network (direct exporting is equivalent to vertical integration in this case).9 The revenue gains associated with lower marginal costs enable the
most productive manufacturers to cover the fixed costs of exporting. However, in our model, the possibility of integrating forward provides a new instrument for firms to lower prices. By neutralizing intermediaries’ markup, acquiring firms enjoy higher operating profits and are thus more likely to bear the fixed costs of exporting. Because the acquisition cost of an intermedi-ary can be incurred only by highly-productive manufacturers, it is more profitable for them to integrate forward. Finally, a notable distinction with the previous works is that a third category of firms emerges from the sorting. Manufacturers with a productivity just below the cutoff associated with the decision to integrate fully, choose to acquire equity shares of an interme-diary (i.e., partial integration without control rights) to reach overseas markets. By shrinking intermediaries’ markup, they obtain higher revenues than non-acquiring firms. While this form of ownership arrangements leads manufacturers to outsource their exporting activities, it is far different in reality to what is termed indirect exporting in the trade literature.
In what follows, we assume without loss of generality that b00(θ) < P
j∂Λ r
ij/∂θ so that a
manufacturer has full control over its intermediary (θ = 1) if and only if ϕ > ϕi. Introducing the configuration in which some firms may partially own their distributor makes the formal analysis more involved. Our main results hold as long as the equilibrium equity share increases with labor productivity.
2.4
Export decision and export sales
A manufacturer without financial participations in an intermediary can serve a foreign country if and only if its distributor can profitably export its product Λrij(0, ϕ) > fij, i.e., its operating
9Note also that both the productivity cutoffs ϕ
i, ϕij and their gap decrease with the attractiveness of the
profits are higher than the fixed costs of exporting. Because Λrij(0, ϕ) rises with labor produc-tivity, an independent intermediary exports a product if the productivity of the manufacturer is high enough. Hence, the variety produced by a manufacturer is exported in country j if and only if its productivity is higher than ϕij with Λrij(0, ϕij) = fij or, equivalently,
ϕε−1ij = ε ε − 1 ε ε − 1 ε−1 εfij Ajτij1−ε (12)
where ϕij is the productivity cutoff for exporting. Clearly, it appears that the double
marginal-ization (ε−1ε ε−1ε ) increases the productivity cutoff for serving country j. In addition, the effect of ε−1ε ε−1ε on ϕij is enhanced when the foreign market size (Aj) declines and trade costs
(τij and fij) increase. Using Eq.(6) and the expression of the final demand qij, we can now
ex-press the value of export sales for non-acquiring manufacturers as a function of the productivity cutoff for exporting:
zij(0, ϕ)qij(0, ϕ) =
ε − 1 ε
ϕε−1 ϕε−1ij fij.
As in Arkolakis, Demidova, Klenow, and Rodriguez-Clare (2008), the export sales of a man-ufacturer depend negatively on the productivity cutoff for exporting and positively on its pro-ductivity.
Regarding the case of a manufacturer owning its intermediary, its product is sold in country j if and only if Λr
ij(1, ϕ) > fij or, equivalently, ϕ > ϕij, where ϕij is the productivity cutoff to
serve market j when θ∗ = 1 is given by Λr
i(1, ϕij) = fij or, equivalently,
ϕij = ε − 1
ε ϕij < ϕij. (13)
Hence, the probability of exporting is higher for a manufacturer acquiring an intermediary. Indeed, manufacturers owning equity shares have not only lower marginal costs but also lower markups. The value of export sales for the manufacturer pursuing forward integration is then given by pij(1, ϕ)qij(1, ϕ) = ϕε−1 ϕε−1ij fij = ε ε − 1 ε−1 ϕε−1 ϕε−1ij fij.
It follows that, for a given level of productivity, an acquiring firm has higher export sales than non-acquiring firms (i.e., pij(1, ϕ)qij(1, ϕ) > zij(0, ϕ)qij(0, ϕ)).
Proposition 2 The probability of exporting and export sales are higher for a firm with an ownership stake in its intermediary because of lower marginal costs and markups.
According to Eq.(13), the export productivity cutoff for acquiring firms is always below that for non-acquiring firms, ϕij < ϕij, and the gap between the cutoffs (ϕij − ϕij) increases with
the market potential of destination country (Ajτij1−ε). This is illustrated in Fig. 1. The dashed
Figure 1: Productivity Cutoffs and Market Potential
line represents the export productivity cutoff of non-acquiring firms. For destinations with large market size and low trade costs (high Ajτij1−ε, see Panel C of the figure); then ϕij < ϕij < ϕi
and all acquiring firms serve country j, while only the more productive non-acquiring firms export to that country. When the interaction term between the market size and trade costs of the destination decreases (Panel B), then ϕi < ϕij, and none of the non-acquiring firms can
serve country j. Finally, for small potential markets (Panel A), then ϕij > ϕi, and only the most productive acquiring firms export to country j.10 Consequently, as the ratio of acquiring firms
over exporting firms, rij = [1 − G(ϕij)]/[1 − G (ϕij)] (where G (ϕ) is a continuous cumulative
function) increases when Aj diminishes and τij increases, then foreign countries with a small
potential market are more likely to be served by manufacturers owning an intermediary and exhibiting high productivity. This is summarized in the following proposition:
Proposition 3 The ratio of exporting firms owning its own distribution network to the total exporting firms serving a given country increases with distance to that country and decreases with the market size of the destination country.
Lower export fixed cost by transfer of intangible inputs. We could extend our frame-work accounting for another purpose of vertical ownership: the transfer of intangible inputs
within firms (see Atalay, Hortaçsu, and Syverson, 2014 for a remarkable description of this phe-nomenon). Owning a distribution network may also help a company to reduce sunk entry costs through standard cost savings, such as the mutualization of transports by wholesalers (boat uploading or downloading, containers); or the acquisition of information on foreign markets. Intermediaries such as wholesalers and retailers, by connecting producers with consumers, may have informational superiority about foreign markets. As underlined by Rey and Tirole (1986), informational asymmetries exist between producers and intermediaries distributing their prod-ucts. Intermediaries are better informed than manufacturers about the state of uncertain demand because intermediaries are able to meet face-to-face with consumers. In addition, the motiva-tions for the acquisition of an intermediary may also lie in intermediaries’ faculty to facilitate trade by filling administrative tasks and managing more efficiently their distribution network. Hence, manufacturers can be motivated to use vertical integration as a business strategy to reduce fixed export costs.
We could assume that access costs to foreign markets may shrink by acquiring an intermediary. For example, sunk export costs could be given by fij(θ), where fij(θ) decreases with θ (for
simplicity if θ = 1, fij(1) = fijW with fijW < fij) and the trade costs to reach foreign countries
are given by τij(θ) (for simplicity if θ = 1, τij(1) = τijW with τijW < τij). With these
specifica-tions, the costs associated with exports are not only specific to the destination but depend also on whether the firm producing the traded variety controls its intermediary.
Under these circumstances, it is readily to check that the productivity cutoff for serving country j when a firm owns its distribution network becomes
e ϕij = ε − 1 ε fW ij fij !ε−11 τW ij τij ϕij < ϕij. (14) where fW ij ε−11 τW ij (resp., (fij) 1 ε−1 τ
ij) captures the access costs to foreign markets incurred
by firms with (resp., no) financial participation in an intermediary. Hence, the difference in productivity cutoffs to export to country j between firms owning a distribution network and the others (ϕij-ϕeij) is specific to the destination country. It depends on the difference in export costs to the destination between the two types of firm organization.
2.5
Entry
Note that, in the model, there is no strategic interaction among manufacturers and each interme-diary distributes the production of a single firm. Nevertheless, horizontal externalities among producers exist through price indices Pj expressed as
Pj1−ε =X
k
Z ∞
1
where Mkj is the mass of variety produced in country k and consumed in country j and µkj(ϕ)
is the ex post distribution of productivity conditional on a variety produced in country k and consumed in country j over a subset of [1, +∞). Hence, because manufacturers are indirectly connected through the price index, an ownership stake of a manufacturer in an intermediary affects the export sales of the other manufacturers (see Eq.(1)) and, in turn, the probability of producing and exporting.
To model the entry/exit firm dynamic, we follow closely Melitz (2003) except that we consider also downstream firms and the fact that manufacturers may have ownership stakes in an inter-mediary. Each manufacturer has to pay a sunk entry cost to produce equal to feunits of labor,
but manufacturers do not know a priori their productivity. Similarly, the intermediaries do not know a priori their supplier (and thus the productivity of the firm producing the product to be traded). We assume that ϕ is randomly drawn from a common distribution g (ϕ) where g(ϕ) is positive over [1, +∞) and has a continuous cumulative function G (ϕ). As in Arkolakis, Demidova, Klenow, and Rodriguez-Clare (2008), we consider that ϕ is Pareto distributed on [1, +∞) with shape parameter γ (with γ > ε−1), where high γ means that production is highly skewed across manufacturers. More precisely, the probability that manufacturer k exhibits a productivity higher than a value x can be written as P (ϕk> x) = x−γ with x> 1.
A manufacturer enters the market as long as the expected value of entry is higher than the sunk entry cost. The expected profit of a manufacturer before market entry is given by [1−G(ϕii)]Πi,
where [1−G(ϕii)] is the probability of entering market and Πiis the expected profit conditional
on successful entry. However, manufacturers have to take into account that an intermediary can serve the foreign market if and only if π(0, ϕ) > 0, or equivalently, its productivity is higher than ϕij. Because the ex post productivity distribution of non-acquiring firms producing in
country i is g(ϕ)/[G(ϕi) − G(ϕij)] and g(ϕ)/[1 − G(ϕi)] for acquiring firms, we have
Πi = X jλij Z ϕi ϕij Λmij(0, ϕ) g(ϕ) G(ϕi) − G(ϕij) dϕ+λWi Z ∞ ϕi Λr ij(1, ϕ) − fij − b(1) g(ϕ) 1 − G(ϕi)dϕ (16) where λij = [G(ϕi) − G(ϕij)]/[1 − G(ϕii)] is the probability of serving country j without
any equity shares in an intermediary and λWi = [1 − G(ϕi)]/[1 − G(ϕii)] is the probability
of acquiring an intermediary and exporting. For simplicity, we have assumed that ϕi > ϕij regardless of the destination. By using the same strategy adopted in Arkolakis, Demidova, Klenow, and Rodriguez-Clare (2008), we obtain the following expression of a firm’s expected profit (see Appendix B.1 for details)
Πi = ϕγii(ε − 1) γ − (ε − 1) X j h fij γ εϕ −γ ij + ϕ −γ i (fij + b(1)) i .
Hence, [1 − G(ϕii)]Πi = wifeis equivalent to ε − 1 γ − (ε − 1) X j h fij γ εϕ −γ ij + ϕ −γ i (wifij + b(1)) i = fe. (17)
It appears also that ∂ϕij/∂ϕi < 0. Indeed, for a given mass of firms, ∂Pj/∂ϕi > 0 because
the fraction of manufacturers with a lower markup increases when ϕidecreases. Because price index diminishes, the demand for the non-acquiring firms (qij(0, ϕ) = Ajpij(0, ϕ)1−ε) declines.
Hence, the less productive manufacturers exit from the export market (ϕij increases). This
reallocation mechanism gives us the following proposition:
Proposition 4 A higher share of acquiring firms (ϕi decreases) reduces the probability of ex-porting by non-acquiring firms.
Given the high fixed costs of exporting, the strategy to integrate forward can act as a barrier to entry for low-productivity (small) manufacturers.
3
Data
Testing the main predictions of the model requires information on the financial linkages be-tween manufacturers and intermediaries but also the export sales of firms. The information must be rich enough to trace all financial participations of a firm as well as the activity sector of its subsidiaries. In the following subsections, we first describe the original dataset we built and then we give some descriptive statistics on the samples considered hereafter.
3.1
Acquisitions by French food firms
We use an original database that compiles information on national and foreign acquisitions of French firms for the years 2008 and 2012. Data originate from the Amadeus database operated by Bureau van Dijk (2008), which records comparable financial and business information for public and private firms across Europe. The data are collected from company reports and balance sheets, and correspond to an almost complete record of French firms. The database is then composed for a large part of small firms. The accounting data include firm-level variables such as fixed assets, capital or value-added among others. The Amadeus database also provides information on ownership stakes between firms, which is of central importance for our study (see Appendix C.1 for a detailed description of the Amadeus database). For each firm, the Amadeus database lists its subsidiaries (if any) and reports their nationality as well as their main activity sector (at the 4-digit NACE level).
We choose to concentrate our study on the “food and beverage industry” (i.e., food firms) as this industry fits the study purpose well due to the prevalence of intermediaries in the flow of food products. Historically, food manufacturers sell to intermediaries (wholesalers or/and retailers)
who sell to end customers. However, the end of the 20th century has witnessed the evolution of supply chain management where some food manufacturers decided to perform distribution and/or retail functions within the distribution channel. This business strategy, far from being specific to this sector, is currently widespread in other activity sectors. Moreover, narrowing our analysis to a single industry limits the effects of contemporaneous shocks (e.g., domestic or foreign demand shocks) that may biais the measure of the intermediary premium.
Departing from the Amadeus database, we construct a pooled cross-section sample that pro-vides information on ownership stakes of French food firms for the years 2008 and 2012. We built our original dataset following three steps. First, we recover the ownership structure of French food firms by using information on financial linkages between firms recorded in the Amadeus database. To mimic our theoretical model, we consider only acquisition transactions that originate directly from French food firms (i.e., direct acquisitions of subsidiaries), exclud-ing all financial linkages through a third party. Doexclud-ing so, we ensure that acquirers benefit from (potential) advantages of the target firm, but on the other hand, the failure to account for indi-rect acquisitions may understate the effect that we aim to measure. Following our procedure, we count 1520 French food firms that have ownership stakes in at least one company. Overall, this represents a total of 3953 direct links. Then, we match French food firms with their sub-sidiaries for both years. For each acquired firm, we know its nationality and its activity sector (at the 4-digit NACE level). It is worth noting that the lack of data over a longer period of time prevents us from identifying the date on which the transactions take place. This point is very important and will be discussed later when we detail our estimation strategy.
Second, we ground our definition of an intermediary on a firm’s main activity. Departing from the NACE classification (Revision 2), we categorize acquired firms into 5 types of activity: (i) upstream activities (producers of agricultural goods processed by the food industry), (ii) horizontal activities(other food manufacturers), (iii) intermediary activities, (iv) transport ac-tivitiesand (v) service activities. We consider as an intermediary every firm that belongs to the wholesaling and retailing activity sectors as well as those that belong to the subsector “food and beverage service activities”.11 Unlike recent studies, we choose to include retailers in the defi-nition of intermediaries because we argue that those firms facilitate trade by connecting sellers and buyers in exactly the same way as wholesalers. Further, the matchmaker role of retailers is highly magnified for food and beverage products owing to the substantial market power of retailers in the downstream market (see Basker and Van, 2010, for instance). Regarding the specificity of food and beverage products, we also include caterers and restaurants for the same
11There is no consensus in the literature on how to define an intermediary. For instance, Ahn, Khandelwal, and
Wei (2011) identify Chinese intermediary firms based on a set of characters in the firm’s name that usually give an indication in China about its main activity. Bernard, Jensen, Redding, and Schott (2010) use the share of firms’ U.S. employment in wholesaling and retailing and define as a Pure Wholesaler or a Pure Retailer firms having 100 percent of their U.S. employment in one of these two categories. Recently, Bernard, Grazzi, and Tomasi (2014) also distinguish both categories of firms but used the main activity business of firms to categorize firms. Nevertheless, they only consider as intermediaries firms with wholesaling as their main activity, such as Akerman (2014) and Crozet, Lalanne, and Poncet (2013) too.
Table 1: Summary Statistics on Acquisitions by Activity Sector
2008 2012
Activity Sector Frequency Percentage Frequency Percentage
Upstream 115 4.16 44 3.71 Horizontal 1,150 41.56 446 37.61 Intermediary 1,033 37.33 477 40.22 Transport 35 1.26 24 2.02 Services 434 15.69 195 16.44 Total 2,767 100.00 1,186 100.00
Notes: The table reports the frequencies and the percentages of acquisitions by French food firms regarding the activity sector of the acquired firm. Overall we count 927 and 593 acquir-ing firms in 2008 and 2012, respectively. On average, each acquiracquir-ing firm owns participations in 2.60 firms per year. Sources: Amadeus database.
reason. Details on the classification are reported in Appendix C.2. Table 1 displays the num-ber of acquisitions by activity sector originating from food firms. We note that approximately 40% of ownership stakes concern an intermediary, a percentage roughly equivalent to financial participations within the same activity sector (i.e., horizontal activity sector).
Finally, we merge our dataset with the French Customs data for the years 2008 and 2012. This dataset is from the register of French Customs and records firm annual shipments by destination at the 8-digit product level (Combined Nomenclature CN8). This dataset provides almost complete information on export sales by French firms. Firms located in France must declare all export flows to non-EU countries exceeding =C1, 000 or =C150, 000 within the EU.12
For the purpose of this study, we only consider export flows of animal products, vegetable products, and foodstuffs by French food firms (i.e., corresponding to HS2 chapters I to XXIV). It should be noted that, apart from the case of vertical integration (i.e., θ = 1), the model supposes that firm export flows are entirely handled by intermediaries. Concretely, this means that the variable of interest for a firm choosing to export indirectly should be the shipment values reported in the Customs data by its intermediary (net of flows generated by other firms goods), while for a direct exporter the variable of interest corresponds to the firm export values. For the case of indirect exporting, we thus need to observe the transfers of goods between food firms and their intermediaries to compute the share of an intermediary’s export flows originating from a food firm. Unfortunately, this information is unavailable and we are not able to recover it.13 Although 90% of acquired intermediaries are owned by a single food firm in the
data, we cannot attribute the totality of the export values reported by an acquired intermediary to its acquiring firm. A large majority of acquired intermediaries also export food products purchased from other firms. Further, for firms that export their products by contracting with an intermediary (i.e., θ = 0), we cannot track their products once they have crossed the borders because the Customs data only report the name of the exporting firm (the name of the producer
12Actually, the threshold for intra-EU export flows rose to =C460,000 in 2011, while for extra-EU export flows,
declaration has been mandatory regardless of the value of shipment since 2009. However, these thresholds are not binding and the Customs data reports a significant number of export flows below these values.
13We are aware of very few studies observing intra-firm transactions between related parties of the same country.
Table 2: Number of Intermediaries Acquired per Food Firms Domestic
# of & foreign Domestic Intermediaries
intermediaries intermediaries intermediaries exclusively
per food firm 2008 2012 2008 2012 2008 2012
1 371 260 349 236 246 171
[2, 4] 118 72 109 67 44 28
5 & + 25 7 24 7 1 0
Total 514 339 482 310 291 199
Notes: The table reports the number of intermediaries acquired per food firms by year and for the three samples considered. The number of intermediaries acquired is broken up in three classes: one intermediary, between 2 and 4 intermediaries, and 5 and more intermediaries. Sources: Amadeus database.
of the good is not reported).
However, using food firms’ export sales can be a credible alternative if the share of non-exporting food firms that own an intermediary that exports is low. Indeed, the higher is this proportion, the more we underestimate the effect of owning an intermediary. Considering the sample of acquiring firms, we only find 10.98% of firms corresponding to this case.14 There-fore, using firms’ export decisions slightly understates the intermediation effect on the prob-ability of exporting because we do not account for firms that export uniquely through their intermediary.15 The downward bias is, however, higher for the export sales analysis because
we also have to account for exporting firms that own an intermediary that also exports.
3.2
Stylized facts on firms’ ownership status
Our pooled cross-section sample provides information on 14, 090 food firms, of which 647 firms own equity shares in an intermediary. Observing the data, we find various situations behind this simple categorization. For instance, some firms have financial participations in both foreign and domestic intermediaries, whereas other firms only acquired domestic inter-mediaries. Further, in addition to these acquisitions, a substantial number of firms also have financial participations with firms operating in non-intermediary sectors. Consequently, by con-sidering only the “raw” effect of owning participations in an intermediary, our estimate could be contaminated by concomitant effects arising from participations in non-intermediary firms. In order to isolate the intermediary premium from other confounding factors that may covary with firms’ export performance, we consider in the rest of the paper three samples. First, we use the full sample of food firms in which we denote two types of firms: (1) firms with no financial participation in an intermediary (non-acquiring firms) and (2) firms having at least one financial participation in a downstream firm classified as an intermediary regardless of its nationality
(ac-14Among acquiring firms, 36.47% of firms export directly, 23.46% of firms export directly and own an exporting
intermediary, and 29.09% of firms do not export as their intermediary.
15As a robustness check, we exclude from the analysis the non-exporting firms that own an intermediary that
exports. The statistical significance of the results presented hereafter remains, while the magnitude of the effects changes marginally.
T able 3: Summary Statistics on Acquiring Firms According to their Ownership Status F ood firm’ s o wnership status Frequenc y Emplo yment Producti vity Exporting Export sales Mean # Mean # (in %) (in = C 100,000) of countries of products Non-acquiring firms Single, acquired and other acquiring firms 13,237 24.58 0.94 21.69 47.16 7.62 6.17 Acquiring firms in D & F intermediaries sample 853 415.64 1.94 62.60 238.30 18.58 12.35 in D intermediaries sample 792 389.90 1.88 60.35 188.77 16.57 12.11 in the intermediaries exclusi v ely sample 490 51.16 1.28 55.10 46.31 13.10 9.69 Notes: This table reports some descripti v e statistics on food firms depending on whether or not the y ha v e equity shares in an intermediary . Non-acquiring firms refers to firms without an y fi-nancial participations in an intermediary which includes firms with no participations at all (single firms ), acquir ed firms and firms with participation in non-intermediary firms (Other acquiring firms ). By contrast, acquiring firms denotes firms o wning equity shares in an intermediary . This cate gory of firms is decomposed re g arding the sample considered. The producti vity v ariabl e corresponds to the log of domestic sales per emplo yee de viated from sector mean (defined at the 4-digit N A CE le v el). Sources: Amadeus database and French Customs data.
quiring firms). This sample is labeled “Domestic & foreign intermediaries”, hereafter. Second, we consider a more restrictive version of this sample in which firms having equity shares in a foreign intermediary are dropped. This sample is labeled “Domestic intermediaries’’. Third, we control for concomitant effects on export performance arising from financial participations in non-intermediary firms by excluding from the sample all firms concerned by this type of ownership. This last sample, labeled “Intermediaries exclusively”, only includes firms without subsidiaries and firms with financial participations uniquely in an intermediary.
Table 2 reports the number of intermediaries acquired per food firms for the three samples considered. We note that a large majority of food firms have financial participations in a single intermediary, and approximately 92% of the acquisitions are domestic. These findings give support to the assumption made in the model.
We provide in Table 3 some descriptive statistics on the size, productivity and export perfor-mance of firms whether they own an intermediary or not (i.e., acquiring vs. non-acquiring firms). In accordance with the predictions of the model, we find that acquiring firms are, on average, larger and more productive. To deepen the analysis, we check that firms self-select to acquire an intermediary based on their productivity (in line with Proposition 1) by running a Probit model where the probability of acquiring an intermediary is explained by firm produc-tivity as well as control variables (firm size, capital intensity, the ratio of intangible assets on total fixed assets, year dummies, and 4-digit industry dummies). The results are reported in Appendix D. The estimates confirm that more productive and larger firms are more likely to acquire an intermediary (in line with Proposition 1).
It also appears that acquiring firms are more likely to export and export (on average) more products to a greater number of destinations than non-acquiring firms. However, it is less clear whether owning participations in an intermediary is correlated with export sales. Indeed, firms with financial participations exclusively in intermediaries have, on average, the same level of export sales than non-acquiring firms.
4
Empirical validation
The theoretical model offers a large number of predictions that we aim to verify. In particular, we are interested in testing the central prediction of the model which indicates that firms owning participation in an intermediary are more likely to export and benefit from higher export sales (see Proposition 2). We also test the predictions on the role played by the characteristics of destination country for the type of firms that export (Proposition 3) and on the reallocation effect (Proposition 4). The results and their analysis are reported in Section 4.1. In Sub-Section 4.2 we test whether the acquisition of intermediaries allows acquiring firms to reduce their access costs to foreign markets (see the discussion in Section 2.4).
Empirical strategy. Our main challenge is to address the lack of information on the date the firm first acquired an intermediary. Ideally, we would quantify the causal effect of owning an intermediary on a firm’s export performance by using a method based on propensity score matching combined with a difference-in-difference estimator (Heckman, Ichimura, and Todd, 1997). By comparing changes in firm export performance before and after the acquisition of an intermediary relatively to a control group, we would be able to measure the impact of the acquisition on the evolution of firm export performance. Unfortunately, our cross-section data prevent us from conducting a difference-in-difference analysis as we only observe firms’ ownership twice. Between 2008 and 2012, we only count 105 firms that take the leap and acquire an intermediary; and within this set of firms only 14 have participations exclusively in an intermediary. Because we do not know the acquisition date, we cannot elicit the causality effect of owning an intermediary on a firm’s export outcome. Instead, we adopt alternative estimation strategies to investigate whether participation in intermediary increases the export performances of acquiring firms.
4.1
Does participation in an intermediary improve the export
perfor-mances of acquirers?
First, we aim at identifying the existence of an intermediary premium (defined as the export per-formance gap between acquiring and non-acquiring firms). Our baseline specification follows closely the sizeable literature that explores the determinants of export market participation (see Roberts and Tybout, 1997; Bernard and Jensen, 2004, for instance). It relates a firm’s export outcome to whether it has acquired an intermediary using a linear form as follows:
Yv,s,t = αINTERMEDv,t+ Xv,t−1β + l=3
X
l=1
ρlEXPv,t−l+FEs+FEt+ ηv,t (18)
where Yv,s,t corresponds to the export outcome (either the export decision resumed by the
dummy variable Ev,t or the log of export sales) of firm v operating in the 4-digit industry s
at time t, INTERMEDv,tis a binary variable indicating whether a firm owns an intermediary at
time t, and Xv,t−1 is a vector of firm v characteristics.16 Following the prediction yielded by
the model, we expect that α > 0. The regression also includes 4-digit industry and year fixed effects (FEsandFEt respectively) to control for industry- and year-specific unobserved shocks
that may affect firms participation in export markets; and a mean-zero disturbance term ηv,t. In
accordance with the literature on market entry costs, we include past exporting status of a firm (denotedEXPv,t−l) as an indicator of its current export performance. The purpose is to account
for hysteresis in exports generated by sunk entry costs; a phenomenon well-documented in the literature. By entering the export market, firms occur important sunk costs that diminish their
Table 4: Food Firms’ Decision to Export (Linear Probability Model) Dependent variable: Export decision Pr [Ev,t= 1]
Domestic
& foreign Domestic Intermediaries intermediaries intermediaries exclusively
(1) (2) (3) Intermediary 0.0680*** 0.0553*** 0.1112*** (0.0151) (0.0167) (0.0221) Productivity 0.0059 0.0261*** 0.0203*** (0.0046) (0.0032) (0.0037) Employ. [2-4] 0.0332*** 0.0449*** 0.0328*** (0.0096) (0.0082) (0.0077) Employ. [5-19] 0.1098*** 0.1235*** 0.0896*** (0.0302) (0.0297) (0.0265) Employ. [20-50] 0.2255*** 0.2347*** 0.1702*** (0.0426) (0.0419) (0.0461) Employ. [> 50] 0.3830*** 0.3881*** 0.2553*** (0.0235) (0.0232) (0.0315)
Exported last year 0.6552*** 0.6511*** 0.6827***
(0.0165) (0.0157) (0.0147)
Last exported two years ago 0.0418*** 0.0391*** 0.0703***
(0.0123) (0.0119) (0.0182)
Last exported three years ago 0.0322 0.0309 0.0639
(0.0235) (0.0227) (0.0386)
Sector FE Yes Yes Yes
Year FE Yes Yes Yes
R2 0.5387 0.5383 0.5248
Observations 14090 13963 10380
Notes: The producitivty variable corresponds to the log of domestic sales per employee deviated from sector mean (defined at 4-digit NACE level). Clustered standard errors (at 4-digit NACE level) reported in parentheses.*, **, *** indicate significance at the 10%, 5%, 1% level, respectively. Sector (defined at the 4-digit NACE level) and year fixed-effects are included.
current profitability. At the same time, these costs may be viewed as investments for future pe-riods and so increase the likelihood to export for next years. Therefore, we control for having last exported up to three years ago. Finally, to limit endogeneity issues, we exploit the richness of the Amadeus database and we introduce firm characteristics (productivity and size) lagged one period to control for unobserved covariates both correlated to firm’s export performance and ownership status.
Export market participation. We suppose that firms self-select into export markets follow-ing the resolution of a model in which current and expected revenues of exportfollow-ing are compared to the current costs of exporting plus the sunk costs of entry. To estimate the probability of ex-porting (i.e., Pr [Ev,t= 1]) based on Eq.(18), we run a linear probability model. The results are
reported in Table 4 for the three samples considered (labeled as Domestic & foreign interme-diaries, Domestic intermeinterme-diaries, and Intermediaries exclusively). Regardless of the sample, larger and more productive firms are more likely to export, which is consistent with trade lit-erature. In addition, we find that exporting last year (or two years ago) raises substantially the
